There are two things I've got to tell you up front. First, I'm not David Letterman, so I hope you're not expecting comedy. (Well, intentional comedy.) Second, this company is not the most popular one around, so if you invest in it, you might get some dirty looks. But investing is about making money, and this one should help you accomplish that. In spades.
The company I have in mind is cigarette maker Philip Morris International. Here are 10 reasons why you should consider owning shares.
No. 10: One product
Some companies operate in multiple, often unrelated areas. McDermott International
No. 9: Long-term management
The current management team has an average tenure of more than 16 years. CEO Louis Camilleri has been with Philip Morris for 32 years. Such experience gives the company a big leg up.
No. 8: Repeat customers
Selling a product or service that customers use over and over again is a very successful strategy. For instance, FedEx
No. 7: Market domination
Outside of China and the U.S., Philip Morris controls one-quarter of the world cigarette market, more than any competitor. It has seven of the top 15 brands worldwide, including the leading brand (Marlboro), which has nearly three times the market share of the runner-up. That kind of dominance is rare.
No. 6: Tons of cash flow
Philip Morris generated $7.1 billion in free cash flow in 2009. Over the six years for which financial information is available, it has averaged more than $5.4 billion annually.
No. 5: High return on equity
Not only does Philip Morris throw off cash, but also earns a tremendous amount off of its equity base. The company has an adjusted return on equity (ROE) far exceeding of 40%, which it's maintained ever since separating from Altria. Only 36 companies trading on major U.S. exchanges (that aren't financials or energy companies) manage to throw off as much cash as Philip Morris and still have an ROE greater than 20%.
Wal-Mart Stores
No. 4: Hedge against a weak dollar
With 100% of its revenue generated outside of the United States, but its reporting in U.S. dollars, the company's revenue and earnings hold up better compared to companies with domestic revenue and earnings, in times of a weaker dollar.
No. 3: In top 100 highest-yielding stocks
Wharton professor Jeremy Siegel has shown that high-yielding, dividend-paying stocks have a significant advantage over the rest of the market. Specifically, he showed in one study that the S&P's 100 highest-yielding stocks outperformed the overall index by three percentage points annually from 1957 to 2003. That may not seem like much, but it's really a big deal.
Since it was spun off, Philip Morris -- which is currently in the top 50 yielding S&P 500 companies -- has outperformed the S&P 500 index by 15.9 points. Exelon
No. 2: Commitment to pay the dividend
Management has often said that it plans to return value to shareholders, which it primarily does through the dividend. In the year-end earnings conference call, Chief Financial Officer Hermann Waldemer said, "We use our growing cash flow to enhance shareholder returns," just before pointing out that the company raised its dividend last September. Last summer, Waldemer stated that the company is committed to its target payout ratio of 65% -- in short, paying investors $0.65 of every dollar it makes in net income.
No. 1: A large, secure dividend
You would think that payout ratio portends a hefty dividend, and you'd be right. Right now, the company is yielding 4.4%. While that's not the biggest yield out there, it's probably one of the most secure because of the company's strong financial position and stable business. According to Standard & Poor's, 804 companies cut their dividend last year -- the highest level since it started collecting data in 1955. That included chemical giant Dow Chemical
Summing it up
All the companies I mentioned above are potentially great investments, enjoying many of the attributes listed above. But each falls short of Philip Morris in a couple of areas:
Company |
It has ... |
Trails PM in ... |
---|---|---|
Amazon |
Repeat customers |
Dividend yield |
Dow |
Significant foreign revenue |
Large, secure dividend |
Exelon |
High dividend yield (top 100) |
High ROE and free cash flow |
FedEx |
Repeat customers |
High ROE and free cash flow |
Lilly |
High dividend yield (top 100) |
Market domination |
McDermott |
Longer-term management |
Dividend |
Wal-Mart |
ROE and free cash flow |
High dividend yield (rank 153) |
Philip Morris stands unique amongst these contenders, qualifying on all 10 attributes. In my mind, that makes it a superior investment.
Even though it pays a great, stable dividend, Philip Morris is not a Motley Fool Income Investor newsletter pick -- not yet. But it would not surprise me to see it become one. It fits many of the criteria that advisor James Early looks for: a growing dividend, a commitment to pay it, and the financial stability to continue doing so.
If you want to get paid by more of your companies, consider taking a free 30-day trial of Income Investor. There, you'll receive a new idea every month, and your pick of all the past ones, as well. In fact, the actively recommended companies have an average dividend yield of 4.8% right now, and the service has easily beaten the S&P 500 since inception. There's no obligation -- simply click here to give it a try.
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This article was originally published on Nov 21, 2009. It has been updated.
Jim Mueller owns shares of Philip Morris and is short Exelon puts, but has no interest in any other company mentioned. Exelon and Wal-Mart are Inside Value recommendations. Amazon and FedEx are Stock Advisor picks. Philip Morris is a Global Gains choice. Motley Fool Options has recommended a write puts position on Exelon. While the Fool's disclosure policy doesn't like smoking cigarettes, it does like smoking dividends.